Franchising Contract
Franchise is a term, now incorporated into our vocabulary, to designate a new form of business. This business type is based on the transfer of a foreign-business model of transferring rights from the Franchisor to the Franchisee including the rights to the brand of the business, its distinctive signs, business models, industry secrets and other elements that characterize and make up the business.
Therefore, as a result of these franchise contracts, distribution networks are implemented in which consumers identify the distributed or fabricated goods, or services that the franchisee provides with those fabricated or distributed goods or services provided by the franchisor – as if a single employer is involved. This situation is the result of company homogenization, even though each business owner is legally independent from each other and in respect to the franchisor.
Article 62.1 of the RD 2485/1998 of the 13th of November of the Act of Retail Trade defines franchise business activity as:
“That which is carried out under an agreement or contract by a company (franchisor) who transfers to another (the franchisee) the right to operate under the franchisor’s business system for the commercialization of products or services.”
The franchising market in Spain represents a figure of growing significance in trade, thereby claiming its important rise in efficient legal response to the problem that may arise in this market. The data of 2011 reflect the growth of this formula for business up 6.5% from 2010. Statistics about the presence of national brands in the world indicate that currently there are 271 Spanish brands in place in over 118 markets, with a total of 17,081 establishments operating, according to the data for the first quarter of 2012 from the Spanish Franchise Association. Certain advantages have influenced this growth such as providing an alternative to unemployment or reducing the risk associated with any business when it is just starting by already having the association of trade name.
The regulation of the franchise agreement in the Spanish legal system is not exhaustive; it regulates different issues that affect it. First, this figure has been legally recognized and a protection for the franchisee has been introduced, which is the weaker of the parties in the franchise business. In this sense, a series of pre-contractual duties have been established which the franchisor must fulfill to the franchisee to protect the franchisee from possible abuse. With the same purpose of protecting the franchisee, a Register of Franchisors has been created that includes useful information for the franchisee. Moreover, we must take into account the rules on competition, both Spanish and those of the European Union.
These are the only limitations that one has to bear in mind when drafting a franchising contract. The remaining contractual issues are subject to the principle of freedom of contract established in Article 1255 of the Civil Code, with the only limitation being, of a general nature, that the agreements do not infringe on any laws or moral or public orders. This means that the franchising agreement is an atypical contract, meaning that the content is not legally regulated.
As the franchising contract is atypical in nature, its content, therefore, is of great importance. This is because the franchising contract is the basic and principal instrument to establish the rights and obligations of the franchisor and franchisee as well formally establish the content of the relationship for all purposes. The contract should clearly contain the essential elements that every contract should have as well as a detailed regulation of the basic content of this type of agreement.
The agreement is a private document signed by both parties: the franchisor and the franchisee. Three elements define the essential content of a franchising contract, characterize the franchise, and serve to differentiate it from other similar figures:
- The transfer of the property rights of the brand
- The know-how (or the knowledge and practical processes verified by the franchisor as a result of its experience)
- The continual support – commercial and technical assistance that the franchisor provides throughout the contract period
Moreover, we can highlight the following essential elements of a franchising contract:
- Remuneration to the franchisor: The parties usually agree on an initial fee, and thereafter there can exist responding payments of royalties (percentage of revenues or others) and/or fixed monthly amounts. It is also usual to include a charge for the image so that the franchisor invests in the advertising of the franchise.
- Exclusivity agreements in favor of the franchisee, which protect it to operate normally in an exclusive geographic area.
- Assumption of several obligations of the franchisee while the contract is in force: such as compliance with the business model considering objectives that the franchisor and franchisee should establish jointly; compliance with the fundamental aspects of the image; following the franchise manual; and providing good customer service.
- Duration: The parties usually agree on a minimum of five years for the franchisee to protect its investment.
- The franchisee has a post-contractual, non-compete obligation.
- Specification of courts with jurisdiction in case of conflict to avoid competition issues in case of hypothetical legal proceedings.
Considering the above, we recommend quality preparation and revision of the franchise contract when starting a business as a franchisee or as a franchisor. This quality preparation and revision is fundamental to the franchise contract because the contract regulates the commercial relationship between both parties.
Marina Bugallal & Teresa del Riego
